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Bitcoin: A $5.

8 Million Valuation
Crypto-Currency and A New Era of Human Cooperation

Mr. Game & Watch

July 25, 2017

This paper tries to demystify Bitcoins value proposition. First, we note that the word Bitcoin
refers to both a digital collectible, as well as to a peer-to-peer computer network. The collectible is
required to make use of the payment network even for transactions denominated in USD1 (not BTC).
The payment network is of enormous general utility, particularly to criminals and victims of political
oppression worldwide.
Bitcoin has the ability to maintain its useful properties, even under harassment by wealthy or violent
adversaries. It can process more transactions than VISA, and can perfectly imitate the properties of
rival crypto-currencies eliminating competition. Bitcoin can be both scarce and digital, because coins
are owned by cryptographic passwords, not by possession of a particular digital file.
Worldwide adoption of Bitcoin is not as unthinkable as it may first appear historically, mankind has
migrated to a new form of money whenever technological improvements make an older form obsolete.
In the future, certain groups (criminals, international travelers, freelancers, the underbanked, welfare
loafers, and the young) may prefer Bitcoin to their local fiat currency, and the remainder of society may
be indifferent between the two (as most individuals have net currency investments which are microscopic
in comparison to the value of their labor, real estate, and equity investments). Very little prevents Bitcoin
from becoming the dominant form of money worldwide.

1 The Two Bitcoin

The word Bitcoin refers to two different things: a digital collectible, and a piece of technology. The
collectible has a market price and individual owners, and in this way it is similar to physical collectibles such
as gold, baseball cards, or oil. The technology, in contrast, is a software application that will attempt to
connect to a peer-to-peer computer network over the Internet. If the connection is successful, the application
will download messages, interpret them, and display them to the end user. Henceforth, we use BTC to
refer to the collectible, and the blockchain to refer to the technology.
The blockchain technology itself produces a resource, comparable to bandwidth, which we refer to as
blockspace. BTC is required in order to rent blockspace. Blockspace is required in order to broadcast a
message into the blockchain.
It is widely believed that blockchain is the technology behind BTC, but in fact the two have a
mutual relationship. BTC prevents the blockchain from malfunctioning. Blockspace (created by a healthy
blockchain) gives BTC its intrinsic value.
BTCs intrinsic value is that it alone will allow the wielder to access the networks blockspace. In turn,
the intrinsic value of blockspace is that it, together with BTC, enables special USD transactions we will
call these Peer-to-Peer Digital USD Payments, or PDUPs (see Figure 1).
These PDUPs cannot be made without BTC. First, there is a fixed cost per transaction, which can only
be paid in BTC. USD must therefore be paid to a BTC-owner, in order to purchase the BTC which the
PDUP requires. Second, BTC must be briefly rented in proportion to the magnitude of the transaction.
Since the lowest ask price is always higher than the highest bid price, BTC-landlords earn USD-dividends
1 Forreadability, this paper uses the abbreviation USD to replace more cumbersome phrases such as US Dollars, tra-
ditional currencies, fiat currencies around the world, non-blockchain currencies, and so forth.
Figure 1: A USD payment that is made through the blockchain payment system [3]. Neither BTC nor the
blockchain are used as money, they are instead used to facilitate a payment of USD. The BTC purchases in
the upper money exchanger offset the BTC sales in the lower exchanger.

on each BTC rented for a PDUP, in an amount proportional to the current bid-ask spread. Therefore,
BTC-owners are compensated, in USD, for the PDUPs which they enable.
Those who invest in BTC, may do so for innumerable reasons, but those who consume BTC do so in
order to take advantage of the PDUP service.

2 The Utility of the Blockchain Payment Network

As explained above, BTC is required in order to make Peer-to-Peer Digital USD Payments (PDUPs).

2.1 PDUPs in Comparison to Traditional USD Payments

At first glance, PDUPs have a number of severe disadvantages. First, they require the user to learn a new
technology and transaction process. Second, PDUPs (despite the name) require the user to interact with
many new intermediaries, including at least one software provider and one exchange. Thus, PDUPs have
a relative disadvantage on cost, speed, and convenience. PDUPs can also be unreliable, in that they can
unexpectedly become more expensive during episodes of high exchange rate volatility.
On the other hand, PDUPs have a number of advantages. First, unlike mainstream digital payments
(for example VISA, Venmo, and ApplePay), PDUPs protect the users anonymity in all cases. Each PDUP
user can instruct his computer to make any number of accounts (even tens of millions), and each account
is defined only by a password, and has no identifying information whatsoever. He can then freely send his
own money to and from these an unlimited number of times, obscuring his total account balance. Newer
cryptographic methods [21] aim to emulate, and even surpass, the privacy of the traditional banking system.
Second, unlike historical digital cash schemes (for example Liberty Reserve and e-Gold), the payment
service cannot be closed down or altered. This profound durability, and indifference to human action, is why
the BTC can be tolerably regarded as a collectible tokens which more-resemble physical gold than they do
entries in a computer database.
Indeed, the name Bitcoin is a clear reference to Bittorrent, a similar technology which enables (among
other things) large-scale Internet copyright infringement. Despite ongoing pressure from major governments
throughout the world [36], the Bittorrent protocol has operated continuously since its invention in 2001, and

during the 2004-2015 period was, at various times, estimated to be responsible for 29%-35% of all Internet
traffic [35].
Bittorrent and Bitcoin are protocols they exist only as a set of rules, and they therefore cannot
be destroyed (even by their authors [41][40]). An endeavor to disable Bitcoin (or Bittorrent) would be as
effective as an endeavor to disable chess, or the French language.2

2.2 Uses of PDUPs

Because PDUPs return financial sovereignty to the user, they are, for better or for worse, optimal for illegal
transactions. PDUPs are often the cheapest (or only) way to engage in gambling, capital flight, tax evasion,
and payments for ransomware3 . PDUPs are often the only way to donate to criminals (for example, to those
who leak copyrighted digital files) or to certain political groups (notably, WikiLeaks [25]). When combined
with TOR (a technology for anonymous web browsing developed by the US Military), PDUPs enable online
purchases of weapons, drugs4 , and prostitutes.
In these cases, PDUPs are more efficient by several orders of magnitude. The total effective cost of
an illegal cash transaction, including travel, time spent, risk of bodily injury, entrapment, fraud, and/or
embarrassment, is enormous. PDUPs let users accomplish as much, from the comfort and safety of their
home computer or mobile phone.
Even in fully legal cases, PDUPs can often be more efficient. For example, many employees of Ama- are paid in Amazon store credit, which in some cases cannot easily be converted to the local currency.
Instead, employees resort to purchasing marketable items (such as iPads), and pawning these off for cash
[44]. Instead, a service called allows employees to quickly liquidate their store credit for BTC.
Employees are so desperate to take advantage of this service, that they tolerate salary reductions of 15%
or more. Purse then liquidates this store credit by servicing a second set of customers: Amazon shoppers
who want to pay with BTC. In this case, Bitcoin helps Amazon employees cash their paychecks, and helps
Amazon shoppers get huge discounts. Purse is 3.5 years old and boasts over $10 million in conversions.

2.3 Intrinsic Value

As the enabler of the PDUP, Bitcoin is therefore intrinsically valuable. BTC helps its owner get paid, cheat
on his taxes, shield his assets from a messy divorce, gamble, engage in underage drinking, defend his life
and property, get stoned, and get laid.5 For those suffering from ransomware or capital controls, PDUPs
may be the only payment option. Victims of Venezuelan hyperinflation [9] (to say nothing of the entire slave
population of North Korea, or the women of Saudi Arabia), may find these illegal blockchain payments to
be the only dignified alternative to suicide.
In this way, the intrinsic value of BTC strongly exceeds that of gold (whose industrial, superficial, and
cultural importance is at an all time low, and which the modern youth neither desires nor, in truth, can
properly recognize) and perhaps even that of the USD (which is required to pay property taxes, on penalty
of imprisonment). This intrinsic value is quite sustainable it will persist wherever the local government
is un-competitive. Most Western democracies feature immobile policies which are attractive to PDUPs:
progressive income taxation, social welfare, large national debts, and fractional-reserve banking (whereby
private banks create new money with each new loan). Individuals, of all dispositions, will be tempted
to maximize their after-tax income by exploiting social programs (to extract USD), while pouring their
work-ethic into a job (that pays in BTC).
2 At first, it may appear that the Bitcoin infrastructure is most vulnerable at the exchange level, because exchanges must

transmit traditional USD and they are therefore bound by the rules and limitations of legacy systems [16]. However, the big
exchanges have private, over-the-counter rivals (such as LocalBitcoins), which are capable of running on the anonymous
darknet after all, if BTC can be used to buy a briefcase full of cocaine [26], it can be used to buy a briefcase full of $20 bills.
The public today uses large, formal exchanges out of convenience, not out of necessity.
3 Ransomware is a technology where hackers, or insiders, compromise a computer system and hold the victims files hostage.

According to an industry report [46], ransomware applications grew by 752% in the year 2016, during which attackers collected
an estimated $1 billion from victims.
4 Roughly 5.2% of the adult population (247 million) regularly uses drugs [48]. An estimated 9.3% of these reported a darknet

drug purchase in 2016 (up from 4.5% in 2014). 5% of respondents stated that they did not consume drugs prior to accessing
them through darknet markets [17].
5 In short, everything that makes life worth living.

It can be shown that BTC will always be the most intrinsically-valuable of all the blockchain currencies.
This is due to a technological breakthrough called the sidechain [45], which allows Bitcoin to imitate the
properties of any rival blockchain technology. In this way, the blockchain technology behind BTC can only
improve, and always at the fastest rate possible.

3 Scarcity
By design, only 21 million BTC can ever be created. This is similar to the way in which a game of chess
only ever contains 64 board locations the computer network is simply defined this way, and operates with
complete transparency at all times.
It is true that Bitcoin the software can be easily copied, and that this copy can be used to build
a new P2P network. This is analogous to creating a new game board, with 64 new squares and 32 new
chesspieces. But this new board will contain a new game, with different opening moves, and the original
chess players will not necessarily be aware of it. It is as if the new game were broadcast on a different radio
frequency by default, no one is listening.
Nor should they. A key benefit of the aforementioned sidechains technology is that it allows users to
reuse the same board to play many simultaneous games. One board is all that is required.
Hence, while the supply of cryptocurrencies is unlimited, the supply of BTC is limited. BTC is scarce,
but cryptocurrencies are not. And it is for this reason that only the former, and not the latter, can be
considered to be money.

4 Bitcoin As Money
Bitcoin was designed to have optimal monetary properties:

Monetary Property Collectibles Gold Banknotes Bitcoin

Intrinsic Value
(individual recourse if this monetary low medium high high
trade network collapses)
(transaction variable costs)1 low medium very high extreme
(ease of constructing fractional units, very low high very high very high
transaction fixed costs1 )
(ability to resist expansion of the money medium very high low extreme
supply, inflation tax1 )
(assay costs)1 low medium high very high
(user privacy, ease of value calculations, low very high low very high
maintenance of recognizability)
(total storage and maintenance costs, high high high very high
including security6 )1

Table 1: Different types of money, and their properties.

Therefore, some PDUP-users may find it efficient to store some of their wealth in BTC. And we may
therefore expect some speculators to purchase BTC as an investment, not only to speculate on its use in
PDUPs, but also to speculate on its use as money.
6 This concept of securing ones money is very context-specific at any given time, a saver may decide that he most fears

thieves, tax authorities, jealous family members, and/or his own carelessness.

The latter speculation is not ill-founded, as mankind has upgraded its money consistently throughout
history. Nick Szabo [39] wrote a 2002 essay on the origin of money, expanding on Richard Dawkins claim
that money is a formal token of delayed reciprocal altruism. Szabo generalizes the behavior of social
mammals to that of pre-monetary humans. In this way, he describes a progression from reciprocal altruism,
to collectibles, and ultimately to gold.
I will here extend the generalization to include the latest newcomers: banknotes and Bitcoin:

Time Supporting New Monetary Marginal Advantage Characteristic Waste

Technologies Medium (cost of teamwork)
50-25 highly-folded brains, status, favors, starvation insurance, unproductive showing-
MYA social instincts reciprocity specialization of labor off, zero-sum competition
c. 250 ka, craftsmanship, cogni- collectibles fungibility, durability, time spent making use-
BCE tive abstraction (beads, shells) portability less collectibles
c. 1.5 ka, scales, weights, forge, precious met- fungibility, divisibility, expenditures on gold
c. 0.7 ka, metallurgy als, bars, coins, durability, scarcity mining, refinement, and
BCE gold vault storage
1960s telephone7 , flight, banknotes portability, divisibility, over-financialization
international trade, (1971) recognizability (loss of lobbying/corruption,
international law scarcity, fungibility) political polarization8
2000s Internet, open source, Bitcoin (2011) intrinsic value, scarcity, energy wasted on
smartphone fungibility, durability double-sha256 mining

Table 2: The anthropological progression of teamwork technology (ie money).

The generalizations are simple enough: as technology progresses, it enables new and superior money
in other words, new and superior ways of facilitating cooperation.
It is noteworthy to point out that mankind will also go in reverse, and downgrade its cooperative medium
when the surrounding technological infrastructure deteriorates. During the relative anarchy of the USSRs
1917-1921 period, workers were unable to rely on banking infrastructure, and instead forged metal collectibles
for use in trade [30]. During the European Medieval Period, serfs were forbidden to leave the farmland on
which they worked, and most economic transactions were therefore among the same few individuals. In
these relationships, gold fell into relative disuse most peasants paid their taxes in food, military service, or
labor. In prisons (throughout history), inmates avoided physical money and instead made investments in an
appropriate reputation, religion, or gang affiliation. When tangible money does appear in prisons, it almost
never takes the form of gold or banknotes instead, they use whatever they have.
In addition to the properties outlined in Table 1 (above), money is said to perform three functions:

Label Summary of the Function Served

medium of exchange establishes a substrate upon which counterparties may express their transactions
store of value allows an individual to transact, not only immediately but also in the future
unit of account simplifies pricing calculations (from O(n2 ) complexity to O(n)) [39] and negotiations

Table 3: The functions of money.

As we have already seen, Bitcoin is so excellent a medium of exchange, that its intrinsic value is grounded
in this property. Bitcoin is also a superb store of value, as it is both scarce and durable.9 When Bitcoin is
7 In 1960, 78% of households had a telephone [38], and 60% had a checking account [31]. By 1970, these percentages had

risen to 91% and 75%, respectively.

8 For an in depth exploration of these claims, see Appendix A.
9 On this point, some will complain about BTCs exchange rate volatility. Firstly, the volatility lies on a consistent downward

trend [8], and would be zero if Bitcoin were the unit of account. But more importantly, this volatility has been almost exclusively
to the upside, which means that it represents the risk of earning too high a return. Since extra money can be freely ignored,
evidence of unexpectedly greater wealth cannot be used against BTCs success in performing the store of value function. BTC
has the highest Sortino ratio (which only measures the risk of loss, not gain) of any asset class in the recent century, [28]
indicating, if anything, profoundly low volatility.

used as money (and not for PDUPs), it will be as good a unit of account as any (if such a function is still
necessary, given that a common smartphone can recompute prices in realtime).

5 Adoption
5.1 Relative Intransigence
Nassim Taleb observed that nearly all of the drinks sold in the United States are Kosher, despite the fact
that less than 0.3% of the American population is Kosher [43]. In explaining this asymmetry, two factors
were at work: first, it was easier for the local store to carry one type of drink, instead of two. Second, there
was a selective intolerance of non-Kosher drinks Kosher customers couldnt tolerate non-Kosher drinks,
but non-Kosher customers could easily tolerate Kosher drinks. Hence, it was costly to stock any mix of
types, and costly to commit entirely to the non-Kosher type (thus losing the business of Kosher customers),
leading to the all-Kosher outcome. Taleb generalized this principle to the spread of automatic gear-shifting
in cars, fast-food chains in high transit areas, support for extremist political candidates, the prominence of
various languages, and religious conversions.
The generalization also applies to Bitcoin, as both factors are strongly present. First, sellers of goods (or
of labor) far prefer to use a single currency, over two. Second, there exists a selective intolerance of the USD
some USD-users are willing to become BTC-users, but many BTC-users are unable to become USD users.
The willingness to switch to BTC is strongest among criminals (including welfare loafers) and their
victims and associates. For these groups, direct BTC payments are faster, cheaper, and more convenient
than the circuitous PDUPs. Secondly, while many individuals find traditional banking to be expensive
or inconvenient, Bitcoin is free to join and piggybacks on the existing telecommunications infrastructure.
Thirdly, we have the privacy-conscious individuals who avoid using credit cards (either in general, or for
especially sensitive purchases).
Interestingly, the selective intolerance of the USD is also present in a much simpler and more general way:
each fiat currency is only tolerated within the borders of a single country but in all others, the currency is
useless. If a man wanders across the globe with USD in his pocket, the banknotes are, more often than not,
completely worthless. They are not tolerated by local merchants in any sense. In stark contrast, BTC
can be accepted everywhere, especially through the use of payment-processors such as BitPay, which will
accept a customers BTC and deposit local fiat currency in the merchants bank account. BitPay is much
cheaper to use for transaction processing than credit cards (which expose merchants to losses resulting from
fraud, identity theft, or chargebacks).
Therefore, the traditional USD is intolerable in many cases. But the reverse is not true there is nothing
that the USD does today that couldnt easily be done with BTC tomorrow (including even the collection of
property taxes, and provision of public services). Relative to BTC, the USD is constrained as a medium of

5.2 Network Capacity

Commercial banks can trivially configure their existing computer systems to accommodate Bitcoin alongside
the USD. Customers could then use the same banking services as always (checking accounts, credit cards,
home equity loans), but with Bitcoin as the unit of account. In this model [12], the blockchain would only
be used for large settlement transactions between banks.
However, such a model is only attractive if users have an alternative available to them in the form of
the blockchain itself. Fortunately, in practice the blockchain network is likely to be quite scalable. As
previously mentioned, Bitcoin can take advantage of sidechain technology [45] to access the blockspace of
new blockchain networks. Since it can create an unlimited number of these, the effective blockspace of the
network is also unlimited. In addition, a technology called the lightning network [33] enables Bitcoin to
cache an arbitrarily unlimited number of transactions to a single blockchain ledger entry. Between these two
technologies, the Bitcoin network can handle millions of transactions per second (in contrast, VISA could
handle only 40,000 tps as of the year 2013 [47]).

5.3 Cultural Norms
In general, economic agents find the thought of abandoning their present currency to be quite daunting. Any
attempt to switch from one currency to another is imperiled by the high likelihood of coordination failure
and the disastrous outcome of wealth-loss.10
However, the loyalty to modern banknote money is probably not as insurmountable as it first appears,
primarily because citizens avoid using their banknotes as a store of value. A recent banking survey [4]
reported that 56% of American individuals had fewer than $1000 in their combined checking and savings
accounts (this $1000 figure represents less than 2% of the household income of just that single year11 ). In
fact, the US Federal Reserve [10] estimates that 20% of Americans have a negative net worth (and the Credit
Suisse 2016 Global Wealth Report [6] finds similar results for the rest of the world). When net worth is
positive, most of it is in equities (Vanguard [49] reports that the median equity-allocation among participants
in their defined contribution plans is 83%, while only 8% is allocated to cash and a mere 5% is placed into
bond funds). In short, most Americans own very few dollars, either because they are too poor to afford any,
or so rich that they can afford to discard them by purchasing investments. A significant portion of the first
world is in debt, and would directly benefit from the demise of their local fiat.
This especially applies to the modern youth, who are born with no loyalty to any particular asset (nor
to any particular political or economic philosophy), and who are more willing to experiment with novel
technology for their own advancement. Todays teenagers are, in fact, already using Bitcoin to gamble on
e-sports (as of early 2016 at least), without their parents knowledge or permission [7]. The BTC-phobic
parent already resembles, or will very soon, the email-phobic grandparent.
A society which adopted Bitcoin as money would find that many of its previously-influential citizens
were immediately worse off. However, as Daniel Krawisz points out [24], these natural opponents can
individually hedge against this risk by purchasing BTC. Therefore, while Bitcoin may threaten the viability
of many of todays organizations and institutions, it can still thrive among the individuals who make up
those institutions. This is a unique function of Bitcoins durability and longevity.

5.4 Self-Fulfilling Prophecies

Astute readers will have already noticed a positive feedback loop: As Bitcoin grows in dominance, it rewards
its earliest adopters; and as new users adopt Bitcoin, they help Bitcoin become more dominant.
Bitcoin appears to proceed in adoption cycles. First, the exchange rate strengthens suddenly. The sudden
appreciation triggers greater media attention (including social media), which, in turn, reminds bystanders
of its objective significance. This ultimately motivates some of these bystanders to become adopters.12
The presence of such a self-fulfilling prophecy strongly increases the likelihood of worldwide adoption.
Previous attempts at a world currency required explicit agreement from many uncooperative groups. Bitcoin,
in contrast, does not require explicit cooperation of any kind it can rise to prominence if world citizens
acknowledge only the mere possibility that it will be found preferable by a few wealthy individuals. Even if
prominent world leaders spoke out against Bitcoin adoption, it would only demonstrate that Bitcoin had
become significant enough to attract their attention after all, who can say that the critic is not himself
stocking up on the currency behind the scenes, just in case?
10 Of course, there is much more to it than the mere risk of some financial loss. If we consider the format of Table 2, and
the assertion on which it relies (that money is a technological refinement of the instinct for reciprocity), then we reach a key
insight: to abandon the monetary status quo is, really, to abandon all of ones current friends and allies.
Imagine a prison, where there is no tangible property and therefore the only money in use is reputational, and further imagine
that one inmate proposes that they all delete all of their reputational memories from their minds, and start over with a blank
slate. Such a proposal would be very distressing to the inmates current friends and associates they are immediately likely to
abandon this careless, ungrateful ally. Simultaneously, the suggestion would threaten and offend the prisons most-reputable
inmates these powerful individuals are immediately likely to become the inmates enemies.
Thus, even to suggest such a thing publicly would be both humiliating and treasonous. Few would tolerate even an open
discussion along these lines, lest it mark the discussants as naive and unreliable shameless and opportunistic. In sum, monetary
revolution is a desire that is explicitly anti-social, and inescapably shameful. To express the desire aloud, is to out oneself as a
defective person someone unworthy of friendship or assistance.
11 Moreover, only 66% of US households keep any assets in a checking account at all, and only 9.9% own bonds of any kind

[10]. In contrast, 77% of US individuals own internet-enabled smartphones [37].

12 It is likely that much of BTCs infamous exchange rate volatility as result of this circularity (and not the result of some

mysterious flaw intrinsic to Bitcoin).

6 Valuation
This investment thesis asks the reader to consider BTC as the dominant world currency. If this is acceptable,
the valuation is a comparatively simple matter of estimating the total value of all the worlds money.
Economists define broad money as the sum of all currency, funds in bank accounts, and anything of
value representing money.13 We can use estimates from the World Bank [50] to estimate the value of all
broad money, now and in the future.

Year World GDP Money Supply Broad Money BTC Supply Price NPV (at 15%)
($T) (% of GDP) ($T) (M) ($M/BTC) ($M/BTC)
1960 1.367 50.5 68.986
2016 75.642 116.4 88.055 15.72 5.60
2017 81.262 118.2 96.016 16.42 5.85 5.85
2027 166.397 137.1 228.171 20.34 11.22 2.77
2037 340.722 159.1 542.222 20.90 25.94 1.56

Table 4: Macroeconomic factors determining the value of all broad money, in given years. Estimates for
future WGDP and MS/WGDP values were estimated by assuming constant growth at their historical rates
(of 7.43% and 1.5%, respectfully). All values are given in current year (nominal) terms, with the exception
of the NPV calculation which is given in 2017 dollars.

The penultimate column gives the estimated USD price of one Bitcoin in each year, in those years where
all broad money takes the form of Bitcoin. In other words, this column first determines what portion of GDP
one could purchase with a given portion of the money supply, and then multiplies this portion against the
future nominal value of GDP. For example, the 2027 figure notes that someone with all of the broad money
in existence in 2027, could purchase goods and services which equaled 137.1% of everything produced in the
year 2027.14 The total produce of 2027 is estimated to be worth 166 trillion (measured in 2027 dollars),
making the purchasing power of the entire 2027 money supply equal to 228 trillion 2027 dollars. Someone
who owned 1/(20.34e6) of the total money supply of 2027 would own exactly one Bitcoin in an all-Bitcoin
world, and about 11.22 million dollars in an all-dollar world.
The final column tries to account for the length of time it takes for Bitcoin to replace the worlds broad
money. Even if an investor is impatient to the degree of 15% per year, and must wait 20 years, Bitcoin is
still an attractive purchase today at all prices less than 1.56 million USD.

7 Limitations, Assumptions, and Future Research

Most clearly, this paper assumes that the Bitcoin system will continue to have the properties that it has
today. Therefore, researchers should investigate ways in which Bitcoin may be made to change its essential
properties. Two properties of particular interest would be the the ability to make PDUPs (fungibility)
and the ability to audit ones account balance (durability and recognizability).
A few of Bitcoins most crucial scalability, fungibility, and anti-competitiveness technologies remain
unfinished. The valuation assumes that these will be finished and deployed in a reasonable time, and
without incident. The basis for this assumption is Bitcoins (very impressive) track record of technological
This paper is not specific to Bitcoin the results could apply to any digital asset with comparable
monetary properties. However, Bitcoin is assumed to emerge as the prominent e-cash, by virtue of its
superior historical precedence, robustness of properties, public awareness, PDUP transaction volume, and
market capitalization. Nonetheless, society may come to adopt a different e-cash technology, especially if it
makes an effort to respect previous account balances (precisely as the Banknote Era opened by respecting
the terminal account balances of the Gold Era), or if the newer e-cash is overwhelmingly easier to use in
PDUPs, or more effectively anti-competitive.
13 In addition to broad money, Bitcoin may replace money substitutes, for example gold, US treasury bonds, valuable col-

lectibles such as art, and personal favors.

14 In other words, everything produced in that year, and some things that were produced in previous years.

Appendix A Waste in the Era of Banknotes
This appendix is an informal account of our current monetary era the Age of Banknotes. We provide it
for three reasons: to justify the format of Table 2, to provide the reader with a broader historical context,
and to try to familiarize the reader with the nature of money.
A major suggestion of this Appendix is that, instead of pointlessly digging gold out of the ground, we
instead pointlessly fight each other for control of a printing press located in Washington D.C. The allure
of the press, and the limitless wealth it can provide, inspires a wide array of useless zero-sum behaviors
namely lobbying, campaigning, fundraising, advertising, election analysis, getting out the vote, and so

A.1 The Incentive to Make Money

The temptation to create (ie, counterfeit) a $20 bill must always be exactly equal to the temptation to
earn a $20 bill through legitimate economic exchange. Thus, if money is to be valued at all, there will be a
persistent incentive to engage in counterfeiting.
However, from the perspective of society at large, counterfeiting is quite harmful. Each activity of the
counterfeiter consumes his scarce effort, and yet in return the only produce is a zero-sum inflation tax upon
his trading partners. Hence the activity is on the whole negative-sum and might therefore be regarded as
For this very reason, societies tend to use forms of money which are very difficult to counterfeit. To
date, however, no form of money has managed to completely resist the expansion of its supply and the
associated wasteful activities. For Bitcoin and Gold, the waste is characterized by mining. For collectibles
(shells, beads, art, and the like) the waste is characterized by labor. For social status, and other forms of
money which are exclusively psychological, each organism is compelled to constantly present itself in the
best light (what Holden Caulfield would describe as phoniness) so as to maximize the respect and goodwill
he receives from his fellow neighbors.

A.2 A Standard of Comparison

In a 1951 paper, Milton Friedman estimates the total annual cost of maintaining a 1900-1950 gold standard
at 1.5 percent of national income [13].15 For the year 2016, that figure would amount to $279 billion for
the United States. By comparison, this was less than half of the federal budget deficit ($587 bn), and more
than twice the gross profits of the Walmart Corporation ($121 bn).
The sections which follow will attempt to set that $279 bn cost against new costs which may have been
created or exacerbated by societys transition to banknote money.

A.3 Money Market Mutuals, Forex Futures, and Private Gold Hoards
Friedman, writing 35 years after the 1951 paper (above), suggests that paper money did not reduce the
waste of the Gold Era as much as he had initially expected (emphasis added) [14]:

...I took it for granted that the real resource cost of producing irredeemable paper
money was negligible, consisting only of the cost of paper and printing. ...while [this] may be
correct with respect to the direct cost to the government of issuing fiat outside money, is false
for society as a whole...

Friedman concluded that banknote money led to zero-sum behaviors which would otherwise have not been
undertaken. In addition to the rise of money market mutuals, and of foreign exchange futures16 , Friedman
cites (emphasis added):
15 Friedmans analysis requires that enough new gold be stockpiled, each year, to maintain price stability (and ward off

deflation). The historical gold standard had no such requirement, yet perhaps the assumption is realistic enough, give that
price inflation from 1791-1933 averaged about 0% per year regardless [34].
16 In 2016, the trading of forex futures and options reached an all-time high [1]. Based on third-party estimates in previous

years, I estimate the total notional value of these [25.22 billion] contracts to be between 30-45 trillion USD. In comparison, the
WTO reports 2015 international trade (the latest data) in actual goods and services as totaling only 20.7 trillion USD.

...a growth industry of hard money financial advisers...encouraging [the public] to
accumulating gold or silver bullion, coins, or other collectibles. ... Since the end of Bretton
Woods, even the direct resource cost of the gold and silver accumulated in private
hoards may have been as great as or greater than it would have been under an
effective gold standard. That depends on whether gold production since 1971 has been greater
or less than it would have been...

Friedman rightly suggests that the answer to his question is not obvious from casual empiricism. Nonethe-
less, we may undertake some, given that this information is readily provided by the U.S. Department of the
Interior [2]:

Figure 2: World gold production over time. Left, cumulative; right, annual.

The events of 1971 (or of 1933) seem to have had no significant long-run effect on global gold production.
It is possible that production efforts would have climbed even higher under a strict gold standard, of course.

A.4 Mining for Banknotes

The previous section limited itself to merely discussing inconveniences that we endure under a system of
floating exchange rates. In contrast, this section will try to describe how banknote money is created, and
following sections will catalogue how individuals might waste resources fighting each other for control of
this printing press.

A.4.1 How Banknotes Are Made

In the United States, there is actually only one bank17 , the Federal Reserve Bank (FED), of which all others
are mere franchises. While these franchise banks (Bank of America, Chase, Citi, etc) compete with each
other on location, customer service, marketing, and so forth, behind the scenes they share a common set of
banknotes, common settlement systems, and common legal requirements (namely, to each store a percentage
of every deposit at a Federal Reserve Bank).
The situation is further encumbered by the confusion that there are actually (at least) two types of
banknote money: high-powered money (sometimes called the monetary base) and demand deposits
(which are most of the so-called money supply). The first can be freely altered by the FED at will. The
second is always18 equal to ten times the amount of the first, due to the voracious lending of the commercial
banks which puts each always against the government-mandated 10% reserve requirement.
Any commercial bank can turn any HPM banknote into ten demand banknotes, and each bank has a
strong incentive to convert as many as possible, as each conversion increase bank profitability directly. While
17 Setting aside the investment banks, which are another matter.
18 This described the state of affairs until late 2008, when the FED began intentionally flooding banks with excess reserves.
We have no space here to fully unravel this complex topic, other than to say that the FED also began paying interest on all
excess reserves, which turned these, somewhat, into bonds (as if these reserves were actually loans made back to the FED).
Thus, it is still as if banks have taken every opportunity to lend out their reserves some modern reserves merely come

the FED unilaterally creates (or destroys) HPM banknotes, the commercial banks all compete heavily with
each other to convert them, and because of this competition the private commercial banks do not truly have
the power to change the money supply. Despite the fact that nine out of every ten dollars in circulation was
created by a private commercial bank19 , each individual bank can do nothing to actually alter the money
supplys grand total if one bank doesnt multiply a HPM note by ten, another bank will. Thus, control of
the money supply and the power of the printing press lies with the FED.
Therefore, the counterfeit expansion of the money supply requires only that sufficient pretext, excuse,
deception or corruption be supplied to the FEDs board of directors. In practice this is most often achieved
via an assertion that the FED must unconditionally ratify the budget deficits of the US Government, even
if the budget is economically unjustifiable or otherwise preposterous.
While the process is quite complex and convoluted, the main conclusion is simple: if the government
spends more in a given year than it collects in taxes, the difference is made up via counterfeiting.

A.4.2 The First Banknotes

The original set of banknotes was created by Executive Order 6102, signed by FDR in 1933. This act forced
all citizens to sell their gold to the FED at a rate of 20.62 banknotes per troy ounce, and it also prevented
citizens from converting the banknotes back into gold.
This event occurred near the end of the interwar period (1918-1939). Initially, this period was char-
acterized by free trade and strong leadership under the victorious Allied Powers (for example, as in the
Washington Naval Treaty), and therefore strong economic growth (as in the roaring 20s). However, it was
later characterized by cultural and economic insecurity (in the form of globalization and the Great Depres-
sion), which led to strong policies of nationalism and in many cases total economic self-sufficiency. The
regional autarky of this period echoed that of the medieval feudal period. Both periods saw a shift in the
preferred monetary technology trading partners felt that their stored-value would have greatest durability
if it resided in the goodwill of their immediate neighbors, where it (and their lives) would be best protected
from looters.
While citizens found direct conversion from USD to Gold to be impossible after 1933, it was made
indirectly possible by the Bretton Woods system following WW2, if one were able to route the dollar through
a foreign government. Initially, these conversions were very rare, as foreign nations were economically and
militarily dependent on the US. However, by the 1960s most countries had recovered, and the US had
become fiscally imprudent. The Gold Standard made its last stand in 1971, during which several foreign
countries either redeemed their hoarded USD for Gold and/or left Bretton Woods, before Nixon suspended
the gold peg in August. Thus a global gold standard reigned in America until 1971, interrupted only by
WW2 and the autarkic economics of total war. It was replaced by the modern era of floating exchange
rates and quasi-nationalized banking.

A.5 Growth in Lobbying Post-1971

The US Political system progresses in multi-year election cycle: House members are elected every two years,
Senators every six, and Presidents every four. And it may take many election cycles for political change to
have impact, as the incumbent typically wins (rendering the election largely inconsequential).
Nonetheless, following the 1971 transition to the banknote era, Washington DC managed to change quite
19 This peculiarity allows bankers and borrowers to jointly levy an inflation tax on the public. Banks print new money, but

this money can only be spent by borrowers, and only on bank-approved projects (for example, housing in the 2000s and higher
education in the 2010s).

Robert G. Kaiser spent most of his 70 years living in Washington DC, and more than 50 years at The
Washington Post, where he rose to the position of managing editor. In the table below, I have taken figures
from Kaisers book on the rise of US lobbying [22], and framed each in terms of compound annual growth
rate (CAGR). I compare each of these to control rate (from the St. Louis FED) over the same time period.

page Years Item Control CAGR CAGR

(Item) (Control)
53 1969-1975 Congressional Staff Senate Civilian Labor Force 10.2% 2.5%
53 1970-1980 Congressional Staff House Civilian Labor Force 5.0% 2.6%
115 1974-1982 Combined Campaign Spending, all Nominal GDP 21.0% 10.1%
115 1970-1982 Cost of the average winning cam- Nominal GDP 14.0% 9.91%
paign in a contested race20 House
115 1978-1982 Cost of the average winning cam- Nominal GDP 66.4%21 9.2%
paign in a contested race Senate
116 1974-1982 Political Action Committees N/A 23.9% 0%
116 1974-1982 PAC Contributions Nominal GDP 26.7% 10.1%
121 1968-1978 Trade Associations, including N/A 8.6% 0%
Unions, Headquartered in Wash-
ington D.C.
142 1978-1980 Money Raised by Both Parties Nominal GDP 38.8% 10.2%
145 1980-1982 Money Raised by Both Parties Nominal GDP 43.1% 8.1%
156 1982-1987 Revenues of Schlossberg-Cassidy Nominal GDP 90.4% 7.8%

Table 5: Sustained, consecutive years of above-average growth would indicate that the economy is reorga-
nizing to promote the underlying activity (over other activities).

Specific exerpts, concerning the Schlossberg-Cassidy lobbying firms invention of the earmark in 1976,
by getting Congress to pay for a new nutrition research facility at Tufts University (emphasis added):

...there were few precedents for what Mayer was seeking: a specific appropriation of federal funds
to a single university for a particular facility... In years to come this kind of legislative
provision would become so common that it acquired a widely used nickname an
earmark...But in 1976 this was an unusual idea. (p69)
Schlossberg recounted a meeting with [Congressman] ONeill [to discuss the Tufts earmark]:
[ONeill] brought in his staff guy and said These two guys work for President Mayer at Tufts.
Were going to try to help them out. I want you to work with these guys. Manna from heaven.
We now have what would turn out to beyou know, like a prospector finding the first nugget
with gold in it. (p70)
Daniel S. Greenberg [respected science writer] asked [in 1983] if the firms clients get their moneys
worth [Do] your customers retainers come back many-fold? In every case, many, many
fold, Cassidy replied. [earlier] Cassidy added that the one. They rep-
resented money spent on science that would not have been spent. (p108)

The Schlossberg-Cassidy firm could deliver these many-fold returns because they had inadvertently
rediscovered the gold mine of the Gold Era not in the ground, but instead in the halls of Congress.
Cassidys claim that these earmarks one is of course irreconcilable with basic economics if
money is created and used to claim resources, then those resources are unavailable for use elsewhere. And
not all of the earmark money was spent on science Tufts would soon be paying Schlossberg-Cassidy
$10,000 a month (p72).
20 This refers to a scenario in which the winner of the election had less than sixty percent of the vote.
21 The phrase just a couple of hundred thousand dollars was interpreted as $300,000.

A.6 Distraction and Hatred
A.6.1 The Trend Toward Greater Polarization
Suspiciously, political polarization has risen consistently in all the post-1971 years [32].

Figure 3: A metric of bipartisanship in the Senate. Polarization was very high during the post-Civil War
Reconstruction Era (1865-77), and declined slightly during the Gilded and Progressive Eras (1977-1914)
before falling sharply during and between the two World Wars (1914-71). However, the distance between
moderate Republicans and moderate Democrats has widened consistently since their divergence in 1971.

Matthew Gentzkow published a report Polarization in 2016 [15] surveying a wide array of polarization
indicators most from 1960 onward (emphasis added):

We are less likely to find people holding liberal views on some issues and conservative
views on others, or to meet a liberal Republican or conservative Democrat. ... We dont see
those on the other side as well-meaning people who happen to hold different opinions or to weight
conflicting goals differently. We see them as unintelligent and selfish, with views so perverse that
they can be explained only by unimaginable cluelessness, or a dark ulterior motive. Either way,
they pose a grave threat to our nation.

The book Polarized America is summarized [27] as follows: the authors find that polarization and
income inequality fell in tandem from 1913 to 1957 and rose together dramatically from 1977 on.
Each year is the most polarizing of all. In the 2016 US presidential cycle, each of the candidates themselves
asserted that their rival was an outright criminal and shouldnt even have been allowed to run. It was
unknown if many of electorate even truly accepts the outcome (Not my president!), or would have accepted
the alternate outcome (This whole election is being rigged!).
In contrast, Senator George McGovern, Chairman of the Select Committee on Nutrition and Human
Needs, is quoted [22] as saying I think its fair to say that we never had a partisan quarrel on that committee
[1968-1977] (p54) something which is today almost unimaginable.

A.6.2 Polarization Helps to make Corruption Mandatory
There is certainly a connection between polarization and poor governing.
I will cite Ferguson [11] (p11, emphasis added):

Politicians in both parties enrich themselves and betray the interests of the nation, including most
of the people who vote for them. Yet both parties are still able to mobilize support because
they skillfully exploit Americas cultural polarization. ...Thus, the very intensity of the
two parties differences on values issues enables them to collaborate when it comes to money.

And again Kaiser [22] (emphasis added):

In an academic survey conducted as early as 1989, 44 percent of the consultants interviewed

reported that their clients were uninvolved in deciding which issues would be emphasized in
their own campaigns. Two-thirds said the candidates played no role in determining the tactics
of their campaigns. (p347) What became known as wedge issues remained effective from the
1980s through at least 2004. If you could win voters alliance with your opposition to
gun control or gay marriage or flag burning, or by being tough on criminals and
terrorists, who needed solutions to big national problems? (p348) In the permanent
campaign, public opinion is not the voice of the people, but something to be leveraged and

Polarization can shield politicians from the electoral consequences of their misconduct. In fact, any
misconduct that is monetizable would now paradoxically help a politician win re-election. The offense
need only be mixed with a dash of incremental extremism.

A.7 Academic Corruption

A.7.1 From the Private Sector
Charles H. Ferguson is hardly a member of the fringe he has a B.A. in Mathematics from Berkeley and a
PhD in Political Science from MIT, and has consulted for the federal government and for large corporations.
In the 90s he founded a tech startup and then sold it to Microsoft for $133 million. This wealth presumably
freed him to follow his lifelong passions of scholarship and film-making, as he then spent a decade at MIT,
Berkeley, the Brookings Institute, and so forth before making the documentary Inside Job.
Keep that in mind, as you read these excerpts from his 2012 book Predator Nation [11] (emphasis added):

The sale of academic expertise for the purpose of influencing government policy, the courts,
and public opinion is now a multibillion dollar business. (p243) The problem of academic cor-
ruption is now so deeply entrenched that these disciplines, and leading universities, are
severely compromised, and anyone considering bucking the trend would rationally be very
scared. (p268). ...the committees that review grant proposals and the review panels that decide
whether papers get published in academic journals are full of professors who consult for financial
services companies. These people will have a major say in whether you get published, get a job,
or get tenure. (p269)
The release of the film Inside Job clearly touched a nerve with regard to these questions. I was
contacted by a large number of students and faculty ... departments including the Wharton School
and Columbia Business School, have adopted disclosure requirements for the first time. But most
universities still have no public disclosure requirements at all, and few if any have any
limitations on the existence of conflicts of interest or of income from such sources...Reporters at
the New York Times, Fortune, and other major news publications are strictly prohibited from
accepting money from any industry or organization they write about. Not so in academia. (p272)

Ferguson reveals that, at elite business schools and economics departments, many senior faculty can
earn most (upwards of 80%) of their annual income by consulting for large banks. He names organizations
such as the Brattle Group, Criterion, Compass Lexecon, and Charles River Associates, in which academics

make themselves available for hire, in order to testify as expert witnesses or produce research papers. In one
example, an academic was paid $100,000 to write a paper that helped Icelandic banks become more profitable
for a time. However, the paper contained mistakes, and the authors negligence likely contributed to public
losses of roughly $100 billion six orders of magnitude larger than the payment to the author. The author
did not indicate, anywhere in the paper, that he had been paid to write it (by anyone, let alone the Icelandic
Chamber of Commerce).

A.7.2 From The Federal Reserve Itself

Excerpts from the Huffington Post article Priceless: How The Federal Reserve Bought The Economics Pro-
fession [18] (emphasis added):

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and
staff economists, so thoroughly dominates the field of economics that real criticism of the
central bank has become a career liability for members of the profession...
One critical way the Fed exerts control on academic economists is through its relationships with
the fields gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish
venue for rising economists, more than half of the editorial board members are currently
on the Fed payroll and the rest have been in the past.
I would date it to maybe the mid-1970s, says University of Texas economics professor
and Fed critic James Galbraith. The generation that I grew up under, which included
both Milton Friedman on the right and Jim Tobin on the left, were independent of the Fed.
The Fed also doles out millions of dollars in contracts to economists for consulting assignments,
papers, presentations, workshops, and that plum gig known as a visiting scholarship. ... the
Federal Reserve spent $389.2 million in 2008 on monetary and economic policy, money spent on
analysis, research, data gathering, and studies on market structure; $433 million is budgeted for
2009. ... thats a lot of money for a relatively small number [est. 487] of economists.
Try to publish an article critical of the Fed with an editor who works for the Fed, says Galbraith.
And the journals...determine which economists get tenure and what ideas are considered
Milton Friedman, in a 1993 letter to [Robert Auerbach, a former investigator with the House
banking committee] argued that the Fed practice was harming objectivity: ...having something
like 500 economists is extremely unhealthy. ... You and I know there has been censorship
of the material published. Equally important, the location of the economists in the Federal
Reserve has had a significant influence on the kind of research they do, biasing that research
toward noncontroversial technical papers on method...
Paul Krugman, in fact, has gotten rough treatment. Ive been blackballed from the Fed sum-
mer conference at Jackson Hole, which I used to be a regular at, ever since I criticized [Alan
Greenspan], Krugman said [in 2007]. Nobody really wants to cross him. ...[in 2005] the
conference was devoted to a field, new economic geography, that I [Paul Krugman] invented, and
I wasnt invited.

A.8 The Greenspan Put and The Financial Crisis

As everyone knows, there was a gigantic financial crisis in the late 2000s, the causes of which are numerous.
But one clear problem was the so-called Greenspan Put. Alan Greenspan famously promised that if the
stock market went down, he would inject money into the economy and lower bank interest rates.22
Greenspan assumed that no one would be able to crash the stock market on purpose, or that no one
would be inclined to do so, or that they wouldnt get away with it, or else Greenspan did not understand
how anyone could uniquely benefit by doing so.
22 This activity tends to stimulate money-creation by banks, and to drive money out of savings accounts and into investments

or purchases. In this way, an unexpected decrease in interest rates causes asset prices to rise, which Greenspan used to give
stockholders a free do over on bad stock market investments.

This perspective was quite flawed. Executives at large financial institutions trivially extracted money
from Greenspans put using what Nassim Taleb called a blowup strategy.
From his congressional testimony [42] following the financial crisis (emphasis added):

VaR encourages low volatility, high blowup risk-taking which can be gamed by the Wall Street
bonus structure...This is the profile for banks (losses in 1982, 1991, and 2008) and many
hedge funds. ...[this] consists in producing steady profits for a long time, collecting bonuses, then
losing everything in a single blowup. Such trades pay extremely well for the traderbut not
for society. For instance, a member of Citicorps executive committee (and former government
official) collected $120 million of bonuses over the years of hidden risks before the blowup; regular
taxpayers are financing him retrospectively. (written submission, p14-15)
This [low volatility, high blowup] is a strategy that is pretty much pursued by the
majority of people on Wall Street, by banks. (p12)
...I am under oath and I will say exactly something that I want to be on the record. I was
a trader for 21 years, and every time I said What if we blowup?, [they] said, Who cares?
The government bails us out. And I heard that so many times throughout my career...
worry about down five percent, ten percent, dont worry about extreme risks, they are not your
problem anymore, its not our problem. I heard that so many times... (p72)
...dont give someone managing a nuclear plant a bonus based on cost savings, okay? (p74)

By pairing this loss event (the blowup) with Greenspans put, executives at large financial institutions
had constructed a portfolio that couldnt lose. The taxpayer, correspondingly, inherited a portfolio that
couldnt win.

A.9 The Public Good

Additional selections from Kaiser [22], indicating the changing nature of the job of Congressperson (emphasis

The Senate was a very different place then [1960s]: small staffs, members [of Congress] did so
much of the work did more of the work talking directly to members...members
knew what they were talking about Gerry Cassidy (p55)
Peter Hart, the Democratic pollster, was certain about it: The quality of people that I started
out with and the quality of people today is just so vastly different...[past Senators]
appreciated the system and they appreciated the gravity of what they were doing and what their
responsibilities were...all of these people where huge figures, not only within [the Senate], but
within the country. (p316)
Hart realized that [his] industry...had helped change the nature of the people who were attracted
to politics. Polls and the political consultants who depended on them shaped what the clients
should say, even what language they should use to say it...The objective was not to govern
effectively, not to lead, but to win. (p317)
Cassidy agreed [that] in the age of modern political technology, the system did not value
people who thought for themselves or wrote their own speeches. (p317) was a complicated system with many participants. The pollsters and consultants certainly
did create demand for expensive services... To pay for these services, politicians had to raise ever-
greater amounts of money... The permanent campaign turned politics into a relentless
struggle for power. Dale Leibach The Hill [Congress] cant exist without downtown [the
lobbyists], and downtown cant exist without the Hill. Its the largest, most democratic bazaar
in the world. And its all about money, going in both directions. (p318)
The mess was created by ordinary people responding logically to powerful incentives. (p346)

The author moved to NYC in 2014, stating that, although he would miss his home town very much, ...for
me, the fun has drained out of the game. So has the substance. ...The intellectual firepower in Congress
declined sharply during my years in Washington [1974-2014]. Lawmakers who read books, have their own
ideas, care about policy issues and believe in government have become rarer than Redskins victories. [23]
Unfortunately, the modern Congressperson is not a statesman serving the public good, but instead a
professional fund-raiser and election-winner. Perhaps this is why we also experience an opposite complaint
that government is too small, or not doing enough. Despite reckless federal spending overall, when examined
in specific the spending seems meagre and unsatisfying.
Until the 1970s, gross investment by the public sector [R&D plus investment in physical capital] averaged
around 7% of GDP, but it fell below 6% in the 70s and 80s, below 4% in the 90s and 00s, and is now at
3.6% and falling. A governments most productive investment, after safety, is in infrastructure. Yet, despite
undertaking the Eisenhower Interstate system in the 1950s, the US now (and since the mid-1970s) devotes
less than 3% of its GDP to infrastructure spending (a figure which, by comparison, is lower than those of
China [10%], India [10%], Europe [5%], or Mexico [3%]) [19].
Federal R&D spending, as a percentage of GDP, fell from 2% in 1966 to 0.7% in 2016 [19], resulting
in less technological growth. The share of scientists with NIH grants in 2016 is half of what it was in
2010, reducing public defense against plague and disease. For primary and secondary public schools, real
(inflation-adjusted) spending per student grew at an annual 4.90% during the years 1947-1970, but only at
1.77% during 1971-2013 [29]. Even an annual rate of 1.77% was enough to triple real spending per student
from 1970-2009, but these funds appear to have been largely wasted Americas high school graduation
rate rose until the 1970s but has been falling ever since (even after adjusting for increasing immigrant and
minority populations) [20]. Todays older Americans are the most well-educated in the world, but todays
younger Americans are not even close.
We might explain this paradox in two parts. First, by noting that two-thirds of the federal budget
(excluding interest) is spent on entitlements such as Social Security (24.9%), Medicare (16.1%), Medicaid
(10.1%), and Other (15.4%, a category containing unemployment benefits, federal retirement, EITC/SNAP,
and so forth) [5]. These expenses take the form of checks that are written to specific individuals they are
not truly public goods at all.23 In the past, the government provided goods that were legitimately public
such as roads, scientific research, containment of infectious disease, and the maintenance of the critical
faculties of the electorate but today it does not. Second, we note that the modern election can determine
the fate of a theoretically unlimited amount of money. Because of this, elections warrant the recruitment
of professional election-winners, and these professionals will exploit every advantage they can find namely
the use of public money for electoral bribes and kickbacks. For this modern type of politician, advocating
for the public good would be a distraction at best, and a severe handicap at worst.

A.10 Conclusion
Life is complex if problems of corruption and financial crisis had simple causes, they would be easy to
foresee and prevent. We certainly do not claim that there is a direct, unbroken line from the use of Banknote
Money to the phenomena of excessive campaign spending or financial crisis. Instead we claim motive and
opportunity: there is always an incentive to counterfeit, and as an empirical matter the public has allowed
professional election managers to capture our governing institutions, and sell these to the highest bidder.
Banknote waste differs from other types of monetary waste in that it is much harder to perceive, by virtue
of the complex nature of banknote creation. In contrast, Bitcoin mining directly consumes electricity, and
gold mining obviously requires engineers, machinery, armed guards and so forth. At first glance, it seems
incredible that impoverished hunter-gatherers would devote some of their precious time to the manufacture
of silly beads and shells and other collectibles.24 And, it seems wasteful indeed, that we humans use our
powerful brains primarily to obsess over what other people think of us. All of these activities are wasteful,
in a narrow sense, but in a broader sense they maintain the infrastructure required to promote and sustain
cooperation. These are social activities we engage in them because we are not alone.
23 Certainly, the [Social Security and Medicare] payments to seniors are little more than bribes and these payments total

forty-one percent of the non-interest budget.

24 Szabo notes that a single mammoth ivory bead may have required one to two hours of labor to manufacture, during an

era when humans lived constantly on the brink of starvation [39].

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